Impact Investing: Measuring What Matters

ESG Impact November 26, 2021

The measurement of Impact investing currently has many dialects but no lingua franca. The Global Impact Investment Network (GIIN) defines impact investments as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” While this definition provides a theoretical starting point for evaluating companies, measuring the impact that they generate is a key challenge for impact investments. 

There is no widely accepted way of measuring impact, much less one that is easy to digest. This applies in particular to investors in listed companies, where impact is only one of several considerations in investment decision making. Systematically collecting impact-relevant data on target companies and evaluating their social impact is challenging when portfolio analysts have to consider hundreds of companies from different industries, and impact is one of several dimensions of the analysis. 

In the absence of a single standard, investors can be overwhelmed by the complexity of, and resources needed for, additional data collection and validation. Some existing approaches rely on tailor-made, detailed measurement methodologies that are implemented by specialist firms and that often reflect investment companies’ own principles or focus areas (e.g., poverty, health, geographical coverage). Conversely, many impact reporting standards that have emerged constitute a long list of metrics relating to every imaginable type of impact without giving any indication of their relative importance for different types of companies. For example, the Global Reporting Initiative (GRI) comprises roughly 200 different disclosures on everything from parental leave policies to the amount of water consumed. 

The current state of measuring impact is to be expected in a developing field that is experimenting with different approaches to impact, and for which contributions towards social causes or the public good can take many different forms, from improving the labor conditions of their employees to lowering their carbon emissions or reaching disadvantaged consumers. As the topic matures, “impact” will become embedded in the approach and language adopted even by those investors that don’t have it as a main focus. Simple and consistent measures are needed that can be used by investors alongside traditional assessment dimensions such as risk and return. This would enable investors to make decisions in practice by using a common measure to compare the impact generated by companies in different sectors (e.g., energy companies and consumer goods companies), the relative impact that can be expected from an investment for different levels of return. Finally, possible trade-offs between these dimensions would be made transparent in a practical way. This is a key part of the toolkit necessary to realize the vision of incorporating societal impact as a third dimension alongside risk/return in a “new efficient frontier” .

Investors wishing to assess listed companies will need measures that enable meaningful comparisons to be made across sectors, and that are simple and readily available. At present, companies and investors are doing their best to report on a long list of metrics that only a few impact-first investors and stakeholders can model and understand. By contrast, ordinary investors and stakeholders who want to use such reporting metrics efficiently or who need a holistic approach that synthesizes in a simpler way the many dimensions of the issue may struggle to make sense of the many different and occasionally conflicting approaches.

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